What
is a Mutual Fund?
A Mutual Fund is a body corporate registered
with the Securities and Exchange Board of India (SEBI),
that pools up the money from individual / corporate investors
and invests the same on behalf of the investors /unit
holders, in equity shares, Government securities, Bonds,
Call money markets etc., and distributes the profits.
In other words, a mutual fund allows an investor to indirectly
take a position in a basket of assets
Which
was the First Mutual Fund to be set up in India?
Unit Trust of India is the first Mutual
Fund set up under a separate act, UTI Act in 1963,
and started its operations in 1964 with the issue of
units under the scheme US-64
Which
are the other institutions that have floated
Mutual Funds in India?
Currently public sector banks like
SBI, Canara Bank, Bank of India, institutions like
IDBI, GIC, LIC Foreign Institutions like Alliance,
Morgan Stanley, Templeton and Private financial companies
like Kothari Pioneer, DSP Merrill Lynch, Sundaram,
Kotak Mahindra etc. have floated their own mutual
funds
How
many Mutual Funds are there in India currently?
Presently there are 33 Mutual Funds
in India and close to 400 mutual fund schemes. We
will very soon be putting up detailed analysis of
major schemes operating in India.
Why
has the concept of mutual funds taken so long
to pick up in India?
Even in the US the concept of
mutual funds has started picking up only in the
last decade. This whole process of investor education
and investor awareness takes a lot of time. But
Indian investors are now beginning to understand
the benefits of investing through the mutual funds
route and hence the collections are beginning to
pick up.
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What
is the total size of the mutual fund sector in India?
Currently the total funds under mutual
fund management in India are a little over Rs.100,000
crore. Out of this UTI accounts for nearly 70 percent
while the private funds account for around 22 percent.
The balance 8 percent is managed by mutual funds floated
by public sector banks and financial institutions.
What
is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India
(SEBI) is the regulatory body for all the mutual
funds mentioned above. All the mutual funds must
get registered with SEBI. The only exception is
the UTI, since it is a corporation formed under
a separate Act of Parliament.
Why
should I choose to invest in a mutual fund?
For a retail investor who does
not have the time and expertise to analyze and
invest in stocks and bonds, mutual funds offer
a viable investment alternative. This is because:
- Mutual Funds provide the benefit of cheap access
to expensive stocks
- Mutual funds diversify the risk of the investor
by investing in a basket of assets
- A team of professional fund managers manages them
with in-depth research inputs from investment analysts.
- Being institutions with good bargaining power in
markets, mutual funds have access to crucial corporate
information which individual investors cannot access.
How
do mutual funds diversify their risks?
Financial theory states that an investor
can reduce his total risk by holding a portfolio of
assets instead of only one asset. This is because by
holding all your money in just one asset, the entire
fortunes of your portfolio depend on this one asset.
By creating a portfolio of a variety of assets, this
risk is substantially reduced.
If
that is the case then why has Morgan Stanley
Fund given such poor returns?
A very important factor that
determines the returns on a fund is the timing
of the fund’s launch. Morgan Stanley
Fund was launched when the equity markets were
at their peak and then saw a sustained downtrend
for close to 5 years. That is the reason the
fund has taken such a long time to appreciate.
Can
mutual funds be viewed as risk-free investments?
No. Mutual fund investments
are not totally risk free. In fact, investing
in mutual funds contains the same risk as
investing in the markets, the only difference
being that due to professional management
of funds the controllable risks are substantially
reduced.
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What
are the risks involved in investing in mutual funds?
A very important risk involved in
mutual fund investments is the market risk. When the
market is in doldrums, most of the equity funds will
also experience a downturn. However, the company specific
risks are largely eliminated due to professional fund
management.
What
are open-ended and closed-ended mutual funds?
In an open-ended mutual fund there
are no limits on the total size of the corpus. Investors
are permitted to enter and exit the open-ended mutual
fund at any point of time at a price that is linked
to the net asset value (NAV). In case of closed-ended
funds, the total size of the corpus is limited by the
size of the initial offer.
Do
both open-ended and closed-ended funds come out with
an initial offering?
Yes. But the only difference is that
in case of open-ended funds, a month after the initial
offer closes the continuous offer period starts when
the investor can enter and exit the fund at a price
linked to the NAV
Is
the purchase and redemption in case of open-ended
funds done at the NAV?
Generally every fund levies either
an entry load or an exit load or both to provide for
administrative and other routine costs. The purchase
price will be higher than the NAV to the extent of
the entry load and the redemption price will be lower
than the NAV to the extent of the exit load.
What
is the investor’s exit route in case of a closed-ended
fund?
According to Sebi regulations, all
closed-ended funds have to be necessarily listed on
a recognized stock exchange. Thus the secondary market
provides an exit route in case of closed-ended funds.
How
do I invest money in Mutual Funds?
One can invest by approaching a registered
broker of Mutual funds or the respective offices of
the Mutual funds in that particular town/city. An application
form has to be filled up giving all the particulars
along with the cheque or Demand Draft for the amount
to be invested.
What
are the parameters on which a Mutual Fund scheme
should be evaluated?
Performance indicators like total
returns given by the fund on different schemes, the
returns on competing funds, the objective of the fund
and the promoters image are some of the key factors
to be considered while taking an investment decision
regarding mutual funds.
As
a lay investor, how do I go about analyzing the mutual
fund scheme?
As a service to the investing community,
We do it for you. Our research team evaluates each
scheme based on primary as well as secondary information
and presents an unbiased report which will help you
to take a decision on whether a fund is worth investing
or not
What
are the different funds we currently have in India?
Currently there exist balanced funds,
Income fund, Growth funds, Sector funds etc. To get
more details about the different funds and their features
please visit our mutual fund glossary
What
are the different types of plans that any mutual
fund scheme offers?
That depends on the strategy of the
concerned scheme. But generally there are 3 broad categories.
A dividend plan entails a regular payment of dividend
to the investors. A reinvestment plan is a plan where
these dividends are reinvested in the scheme itself.
A growth plan is one where no dividends are declared
and the investor only gains through capital appreciation
in the NAV of the fund.
Which
plan should I choose?
It depends on your investment object,
which again depends on your income, age, financial
responsibilities, risk taking capacity and tax status.
For example a retired government employee is most likely
to opt for monthly income plan while a high-income
youngster is most likely to opt for growth plan.
What
is a Systematic Investment Plan and how does it operate?
A systematic investment plan is one
where an investor contributes a fixed amount every
month and at the prevailing NAV the units are credited
to his account. Today many funds are offering this
facility.
What
are the benefits of s Systematic Investment Plan?
A systematic investment plan (SIP)
offers 2 major benefits to an investor:
- It avoids lump sum investment at one point of time
- In a scenario of falling prices, it reduces
your overall cost of acquisition by a process
of rupee-cost averaging. This means that
at lower prices you end up getting more
units for the same investment
What
is NAV and how it is calculated?
NAV is the net asset value of the
fund. Simply put it reflects what the unit held by
an investor is worth at current market prices. For
details on calculation methodology and formulae, please
click on our mutual fund glossary
What
proportion of my investment should be invested in
mutual funds?
Once again this decision will depend
on factors like your income, savings, risk aversion
and tax status.
Like
IPOs, can there be any situation wherein I am not
allotted the units applied for in the initial offer?
In case of closed-ended funds there
is a target amount and the funds are permitted a green-shoe
option to retain over-subscriptions up to a certain
limit. In case of open-ended funds there are no such
limits and all applications are honored.
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How
do I get the information regarding the forthcoming
schemes of different mutual funds?
For the guidance of the investors
our web site is giving a detailed analyses of the forthcoming
schemes of different mutual funds .You can visit our
website to get such information on forthcoming scheme
openings.
Can
a Mutual Fund assure fixed returns?
As per Sebi Regulations, mutual funds
are not allowed to assure returns. However, funds floated
by AMCs of public sector banks and financial institutions
were permitted to assure returns to the unitholders
provided the parent sponsor was willing to give an
explicit guarantee to honor such a commitment. But
in general, mutual funds cannot assure fixed returns
to their investors.
How
much return can I expect by investing in mutual funds?
Investors need to be clear that mutual
funds are essentially medium to long term investments.
Hence, short-term abnormal profits will not be sustainable
in the long run. But in the medium to long run the
mutual funds tend to outperform most other avenues
of investments at the same time avoiding the risk of
direct investment accompanied with professional fund
management.
What
is the difference between mutual funds and portfolio
management schemes?
While the concept remains the same
of collecting money from investors, pooling them and
investing the funds, the target investors are different.
In the case of portfolio management the target investors
are high networth investors while in case of mutual
funds the target investors are the retail investors.
How
does the concept of entry load work in case of unit
purchases?
An entry load is an additional cost
that an investor pays at the point of entry. Assume
that your proposed investment is Rs.10,000/-. Also
assume that the current NAV of the fund is Rs.12.00
and that the entry load is Rs.0.50. Then you will receive
10000/12.50 = 800 units. For detailed explanation of
entry load, refer our mutual fund glossary.
How
does the concept of exit load work in case of unit
redemptions?
An exit load is levy that an investor
pays at the point of exit. This is levied to dissuade
investors from exiting the fund. Assume that the current
NAV of the fund is Rs.12.00 and that the exit load
is Rs.0.50. Now if you sell 800 units then you stand
to receive 800X11.5 = Rs. 9200. For detailed explanation
of exit load, refer our mutual fund glossary.
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Can
an investor redeem part of the units?
Yes. One can redeem part units also.
Say
I redeem and buy and do likewise several times then,
how do I keep track of my portfolio?
The moment you buy or get allotted
the units, a passbook will be given to you mentioning
the number of units allotted/bought and redeemed by
you. The recording of entries would be similar to your
pass book entries in the bank. In mutual fund terminology
it is called Account Statement.
Nowadays,
I see lot of advertisements of Infotech funds. Do
you advise to invest in them?
As an investor you need to exercise
caution in two areas :
- Most funds while advertising tend to annualize
their monthly returns which is arithmetically correct
but technically wrong because usually such returns
are not sustainable.
- The fund must have a sound strategy for
analyzing and investing in infotech companies
What
are the broad guidelines issued for a MF?
SEBI is the regulatory authority of
MFs. SEBI has the following broad guidelines pertaining
to mutual funds :
- MFs should be formed as a Trust under Indian Trust
Act and should be operated by Asset Management Companies
(AMCs).
- MFs need to set up a Board of Trustees
and Trustee Companies. They should also
have their Board of Directors.
- The net worth of the AMCs should be at
least Rs.5 crore.
- AMCs and Trustees of a MF should be two
separate and distinct legal entities.
- The AMC or any of its companies cannot
act as managers for any other fund.
- AMCs have to get the approval of SEBI
for its Articles and Memorandum of Association.
- All MF schemes should be registered with
SEBI.
- MFs should distribute minimum of 90%
of their profits among the investors.
There are other guidelines
also that govern investment strategy, disclosure
norms and advertising code for mutual funds.
Am
I eligible for rebate on income tax by investing
in a MF?
Yes in case of certain specific Equity
Linked Saving Schemes, tax benefits are available under
Section 88 of the Income Tax Act. In such cases the
fund prospectuses explicitly states that it is a tax
saving fund. In such cases 20 percent of your contribution
will qualify for rebate under Section 88 of the Income
Tax Act.
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Do
investments in mutual funds offer tax benefit on
capital gains?
Yes. If the capital gains earned by
you during a financial year is invested in specified
mutual funds then such capital gains are exempt from
capital gains tax under Section 54EA and Section 54EB
of the Income Tax Act. For more details on scheme specific
exemptions. Contact Us.
What
is the difference between Section 54EA and Section
54EB as far as capital gains tax exemptions are concerned?
Under Section 54EA the net Consideration
(total sale consideration – relevant expenses)
arising out of sale of Long Term capital assets need
to be invested in specified in specified mutual funds
with a lock-in period of 3 years. Under Section 54EB
just the capital gains are re-invested but the lock-in
period is 7 years.
Please note that in the
latest budget this exemption is being withdrawn
for investments in mutual funds and is being
restricted only to bonds issued by NABARD
and by the NHAI.
Can I claim
tax exemption under Section 88 and Section 54 for
the same investment?
No. You cannot. You can either exempt
your income from tax under Section 88 or exempt your
capital gains from tax under Section 54.
Do
mutual fund investments attract wealth tax?
No. Under the Wealth Tax Act, all
financial assets, including mutual fund units are exempt
totally from Wealth Tax.
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If I gift mutual fund units, does
it attract gift tax?
If I gift mutual fund units, does
it attract tax?
Is
my income from mutual funds exempt from
income tax?
Yes. Your income from mutual
funds in the form of dividends is entirely
exempt from income tax provided the fund
in question is a equity/growth fund where
more than 50 percent of the portfolio is
invested in equities.
Please note that in the
current Union Budget 2000, the tax on debt
funds has been increased from 10 percent
to 20 percent.
What
are my major rights as a unitholder in a mutual fund?
Some important rights are mentioned
below:
- Unit holders have a proportionate right in the
beneficial ownership of the assets of the scheme
and to the dividend declared.
- They are entitled to receive dividend
warrants within 42 days of the date of
declaration of the dividend.
- They are entitled to receive redemption
cheques within 10 working days from the
date of redemption.
- 75% of the unit holders with the prior
approval of SEBI can terminate AMC of the
fund.
- 75% of the unit holders can pass a resolution
to wind-up the scheme.
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